EU Budget Reform

Lord Dykes: My Lords, I thank the Minister for that detailed Answer, but was it none the less a colossal mistake by HMG to go on in recent years about being the fourth richest country in the world, and at the same time to insist on our unique and long-standing rebate being fully maintained unless there was a considerable reduction in agricultural support for the eight new central European members? How will the Government now repair the damage with those countries, as there is still smouldering resentment about what happened in those negotiations, which did not go very well all the way through the six-month period? What will now be done? What will the Government's attitude be to those countries? What other things can HMG offer on a bilateral basis?

Lord Howell of Guildford: My Lords, continuing the spirit of new year agreement, would the Minister agree—as I think most people would—that the last six months of the British presidency was a sadly missed opportunity to get hold of serious reform of the budget? Under the new deal agreed before Christmas, which the Minister has already mentioned, the UK will pay the EU an average of £10.5 billion a year—that is, even after the reduced rate—and then it will get back £4.5 billion a year in EU spending, so the average net contribution between now and 2013 will be an increase each year of £2.5 billion above what we were paying before. Is that right and, if so, what cuts in public services will we make to meet that sum?

Lord Blackwell: My Lords, will the Minister confirm that up until December the policy of the Government was to seek to redistribute structural funds from the richer countries to the poorer countries rather than to increase the budget and increase contributions? Is that still the case and is the Minister satisfied with the December outcome?

Lord Drayson: I will certainly express the sentiments of the whole House, which have been reflected this afternoon, to the department and to the Secretary of State, who I know is looking at the matter.

Lord Evans of Temple Guiting: My Lords, the National Assembly for Wales already has strong scrutiny procedures and the Government of Wales Bill, which is being debated in the other place today, will ensure that legislation is thoroughly scrutinised when the Assembly acquires legislative powers. At a minimum the Assembly's new standing orders will make provision for scrutiny on the principle, detail and final text of legislation put before the Assembly.
	Crucially, the Assembly, in considering the White Paper Better Governance for Wales made no recommendation on increasing the number of Assembly Members. The First Minister, Rhodri Morgan, said:
	"You do not need more Assembly Members, you simply need the existing number of Assembly Members dealing with more important issues which they do not have the ability to do now but they would have the ability to do under the provisions of the White Paper".

Lord Forsyth of Drumlean: My Lords, did the Minister have the opportunity to study the edition of the Scotsman that was published on Christmas Eve? The front page story showed that the total additional cost, over and above the previous cost of establishing and running devolution in Scotland will go over £1 billion in the current quarter? I congratulate the Minister on resisting any temptation to go further down that route.

Lord McKenzie of Luton: My Lords, I beg to move that this Bill be now read a second time. It may be helpful if I begin by setting out some of the background to the Bill presently before you, before turning to the details of its provisions. As many of your Lordships will be aware, at the time of the Pre-Budget Report on 2 December 2004, the Government made a statement to the other place. This outlined how, despite the best efforts of successive governments, we continue to be presented with ever more complex and contrived arrangements designed to avoid income tax and national insurance on the rewards from employment. That statement made it clear then that the Government intended to close down this activity permanently.
	That statement mentioned the early attempts at avoidance in this area that took the form of paying bonuses and salaries in gold bullion, diamonds and fine wine. When those routes were closed, employers started to pay bonuses through ever-more sophisticated financial instruments and securities to reduce the amount of national insurance they had to pay, to avoid their obligation to operate PAYE, and to reduce employees' tax bills.
	The tax avoidance disclosure rules introduced in the Finance Act 2004 brought to light a large number—over 100—instances of such schemes being devised or marketed by promoters. This showed that a significant minority of employers and their advisers were continuing to devise, operate and market ever more contrived avoidance schemes to disguise what is, in effect, remuneration.
	Our records show that 60 per cent of disclosed employment schemes involve artificially restricted securities. The remaining 40 per cent are fairly evenly split between employee benefit trusts, options and future contracts, exempting income, service companies and other employment products. Only a handful—some 5 per cent—are what we would consider to be other than contrived avoidance schemes.
	That sets out the context in which this Bill is being brought forward. To emphasise this point I would mention to your Lordships that there have been numerous examples of contrived schemes that the present Government have had to contend with since 1997. Examples include contrived schemes involving employee benefit trusts; soft currency loans, such as those denominated in Turkish lira; adjustable options; special purpose vehicles; and artificially restricted shares.
	I do not propose to take up the House's time with detailed descriptions of these schemes—some of them are very complex indeed. But it is clear that without prompt and decisive action there is a very real possibility of tax and national insurance contributions avoidance schemes continuing, to the detriment of the Exchequer and to the many employers and employees who pay their fair share of tax and national insurance.
	The Government gave notice in December 2004 of their intention to deal with any future arrangements designed to frustrate our intention that employers and employees should pay their fair share of tax and national insurance contributions on the rewards from employment. Where we become aware of arrangements which attempt to frustrate this intention we will introduce legislation to close these down, where necessary with effect from 2 December 2004.
	I emphasise that the Government are resolute about this, and that statement still stands today as strongly as it did when it was made. The Government continue to look closely at what has happened since that date. The Government want employers and their advisers to be in no doubt that, if they continue to avoid their responsibilities or are thinking of doing so in the future, we will not hesitate to introduce further legislation to close down their schemes—if necessary, from an effective date earlier than the announcement of such legislation, potentially from the date of the statement of 2 December 2004.
	As a first step in demonstrating the Government's commitment to take action, Schedule 2 to the Finance (No. 2) Act 2005 was introduced to strengthen the income tax rules dealing with employment related securities, dating back to 2 December 2004. The Government had already published a draft technical note alongside the Pre-Budget Report in 2004, explaining the proposals, followed by draft legislation in February 2005. Interested parties have therefore had an extensive period to scrutinise and comment on the detail of the provisions that were then fully debated in the other place during the Standing Committee stage of that Act.
	The second legislative step demonstrating the Government's continuing commitment to take action against avoidance is the introduction of this Bill. It is key to achieving the Government's objectives of fairness and opportunity by ensuring that all pay their fair share of tax and national insurance. It is also an essential element in building a serious and credible deterrent against future avoidance activity.
	The Bill will ensure that the Government can deal with any arrangements that emerge in future that are designed to frustrate its intention that employees and employers should pay the proper amount of tax and national insurance on the rewards of employment. As there is no annual equivalent of the Finance Bill for national insurance, this Bill provides the necessary powers to apply national insurance to payments from these schemes.
	Where the Government become aware of arrangements that attempt to avoid national insurance contributions as well as tax, they will introduce regulations to close them down, where necessary from 2 December 2004. That action will not affect the vast majority of employers and employees who organise their affairs in a straightforward and transparent way. In particular, genuine employee share schemes and share option plans will not be affected. The Bill provides for a power to make regulations in respect of national insurance that take effect on or after 2 December 2004, to reflect backdated tax changes. The power will allow for national insurance liability to be charged from 2 December 2004, if necessary.
	The Bill is needed to extend existing regulation-making powers, and to make it possible to impose a national insurance charge on disguised remuneration that is capable of taking effect from that date. Currently, an NIC liability can usually be charged only from the date of NIC regulations, except in limited circumstances where the regulations can be backdated to the beginning of the tax year in which the regulations are made. This is in contrast to the position for tax legislation, where liability can, if the legislation so provides, be applied back to a date preceding Royal Assent.
	The Bill also allows for consequential changes for the purposes of contributions, contributory benefits and statutory payments to be made where appropriate. For instance, a national insurance charge may be levied back to 2 December 2004, to align with the start date of anti-avoidance tax measures. In this case, the provisions of the Bill, and regulations made under the powers in this Bill, will ensure that those contributions will count for the purposes of contributory benefit and statutory payments.
	The Bill also provides a power to extend to national insurance the avoidance arrangement disclosure rules that currently apply to income tax. Finally, it provides a power to prevent the use of national insurance contribution elections and agreements over shares and securities that have been targeted by backdated national insurance regulations made under this Bill. That will mean that employers cannot pass on to their employees the national insurance liabilities that they have tried to avoid.
	The provisions in this Bill extend to Great Britain and Northern Ireland. Clauses 1, 3 and 5 are intended to extend to England and Wales and Scotland only; Clauses 2, 4 and 6 are intended to extend to Northern Ireland only; and the remaining provisions of the Bill are intended to extend to England and Wales, Scotland and Northern Ireland.
	Your Lordships will of course be concerned to know that the powers provided for in this Bill go only so far as is necessary, and no further. Significantly, the Government have ensured that the Bill also contains important safeguards to ensure that regulations made under the Bill take full account of human rights considerations. This is in addition to the Government's existing duty to make regulations that are compatible with the European Convention on Human Rights.
	The power to make regulations altering liability is restricted to reflecting, so far as is possible, employment remuneration measures in tax legislation—normally via Finance Acts—and is intended only to be used to reflect tax anti-avoidance measures. So where such regulations are made, the other place will already have had the chance to consider any relevant human rights issues on backdated tax legislation during the passage of the relevant Finance Bill or other legislation. Furthermore, to ensure that the regulations under this Bill are subject to parliamentary scrutiny by both Houses, they will be subject to the affirmative resolution procedure.
	This Bill also includes a specific provision to ensure that where, for instance, as part of a package of anti-avoidance measures, there is exceptionally a reduction of national insurance liability for past periods, any existing or future benefit entitlement will not be affected.
	The Government are committed to publishing draft regulations under the powers in this Bill a minimum of 12 weeks before they are made so that employers and their representatives have an opportunity to comment on the technical content of any proposed NIC changes. Once this Bill has received Royal Assent, any NIC legislation will have to be laid within 12 months of the corresponding retrospective tax legislation.
	In pursuit of that commitment and to assist in consideration of this Bill, I should mention to your Lordships, if you are not already aware, that draft regulations were published on 14 November in respect of: the first use of the powers in the Bill to backdate national insurance liability to reflect the employment-related securities anti-avoidance provisions in Schedule 2 to the Finance (No. 2) Act 2005; and to prescribe an additional statement to be contained in future forms of national insurance elections that will make clear the election cannot transfer backdated employers' national insurance liabilities to their employees. This regulation is to be made using existing powers in the Social Security Contributions and Benefits Act 1992; and extends the tax avoidance disclosure rules to national insurance.
	Before I conclude, I wish to draw to the attention of noble Lords the report of the Select Committee on Economic Affairs on the Finance Bill 2005. In the Summary of Conclusions and Recommendations, the carefully considered report of the noble Lords said:
	"We listened with increasing concern to the catalogue of ingenious schemes devised over the years in order to pass remuneration value to employees (particularly bonuses to the higher paid) in a way that attempted to avoid or reduce income tax and NICs. We took note of the view of HMRC that, even after the measures in the present Bill had passed into law, 'there will be something new, the whole history of this suggests there will be, and we will have to counter that when we get there'. Given the vast amount of tax at stake and in the light of that history we were persuaded that an exception to the normal approach to backdating was justified. Moreover, it seemed to us that the suggestion that professionals might now find it difficult to advise about remuneration packages that included share schemes and share option plans for the generality of employees was an exaggeration."
	I would take this opportunity to confirm to your Lordships that the Government wholly concur with that conclusion.
	In conclusion, I hope I have explained why the Bill is important and necessary to ensure fairness. As I have said, it will not affect the vast majority of employers who do not seek to avoid their tax and national insurance liabilities through avoidance schemes. I have also explained how a small minority of employers have persistently sought to avoid their obligations. This Bill is an appropriate and proportionate response to national insurance avoidance of that kind, and I commend it to the House. I beg to move.
	Moved, That the Bill be now read a second time.—(Lord McKenzie of Luton.)

Lord Skelmersdale: My Lords, the House will be extremely grateful to the Minister for his introduction to this quite technical Bill, but I found interesting what he did not say. First, the Treasury in its current straitened circumstances needs all the revenue it can get. Secondly, until Royal Assent of the Finance (No. 2) Bill to which the Minister referred, what was going on was totally legal. It is one thing to stamp on such tax avoidance schemes at a particular time. I disagree with the conclusion of the committee to which the Minister referred, and which the Government accepted with alacrity, that retrospection is suitable in this particular case.
	As the Minister said, most of the Bill arises from a Government warning in a Written Ministerial Statement that both tax and national insurance contributions would be payable on non-pay remuneration of employees from 2 December 2004. As far as the tax position was concerned this was enacted in last year's Finance (No. 2) Bill, which became law last July. It was to be retrospective, as promised, to the date of the Written Statement some six months earlier.
	In my book, retrospective legislation is bad legislation, whether of tax or national insurance. Unfortunately, even though your Lordships' House conventionally rails against retrospective legislation and often votes it down, this House is barred by the Parliament Acts from amending finance Bills and could do nothing about it. None the less, the back-dating of tax on non-pay remuneration is now law and we have to accept that fact. I suppose the Government could claim that it is only for six months so they can get away with it—which they have.
	Today we have a totally different situation. We are not concerned with the tax position of employees, we are considering the national insurance charges of both employers and employees. The question arises whether the employer would have remunerated his employees so generously if he had been aware of the extra subvention he would have to pay. It is no good the Minister saying that he was warned. How many employers read Written Ministerial Statements? I suspect very few, unless they have a government relations department that scans Hansard for them. In any event, having been told by the latter or by their trade organisations, they might have felt that they had got away with not having to pay NICs. Is this Bill then due to an afterthought? Why has it taken so long to introduce it? Why could its contents not have been incorporated in Schedule 2 to the Finance (No. 2) Act last July, or would that imply the breaking of a golden rule of social security—that national insurance charges are not a tax? Could the Minister read from the updated brief why NICs are not a tax?
	I was sent a Written Answer at the end of the last Session that is revealing. I had asked Her Majesty's Government whether the money saved by moving women's retirement age from 60 to 65 would remain in the National Insurance Fund. The noble Lord, Lord McKenzie of Luton, himself answered that the Government would continue to make decisions on NICs and social security benefits funded from the National Insurance Fund in the Budget and Pre-Budget Report. In other words, the Chancellor is fully prepared to appropriate the money from the fund into general taxation rather than, as sometimes happens, the other way round. I shall have more to say about this when we debate the Turner report in a few weeks' time.
	To return to the Bill proper, much of it is to do with the threat of retrospection—for a minimum of 18 months. Can the Minister give me any precedents for NICs being backdated as far as that? If not, he will surely suffer the condemnation of your Lordship's committee on deregulation, which I hope will also comment on the word "expedient", which appears several times in the first two clauses. It would be helpful both to me and to the committee if the Minister said when it will and will not be expedient for national insurance charges to be backdated. Whether they should be at all, I shall leave as a matter for discussion in Committee.

Lord Rosser: My Lords, I express my support for the Bill which, as my noble friend said, is intended to deter employers from using schemes to avoid paying national insurance contributions on the rewards from employment. Whether, if the Bill is passed, that objective is achieved remains to be seen. The tax avoidance planning industry—it is an industry—seems to employ some of the brightest individuals in the country, which speaks volumes about our priorities and culture. No doubt, as one loophole is closed, able minds will continue to seek to open others, as has already happened following previous legislation in this field by the Government.
	The battle to persuade a small section within society to pay its fair share has been long running and it would be highly optimistic to believe that the Bill brings an end to the saga, despite intended powers to close down avoidance schemes, introduce national insurance contributions liability effective, if necessary, back to December 2004 and extend current disclosure rules to cover national insurance contributions avoidance schemes. However, it is a battle that should continue to be waged, as what is going on is clearly a slap in the face for the overwhelming majority of employers and employees who pay their fair share.
	I understand that the latest information available shows that a relatively small number of individuals have received considerable bonuses as a means of avoiding paying their fair share of tax and national insurance contributions. Apparently, a few hundred employers are engaged in the use of schemes on the rewards from employment whose purpose is simply to avoid income tax and national insurance contributions. I gather that it is estimated that the measures in the Bill will, if successful, result in additional national insurance contributions running to a few hundreds of millions of pounds per annum.
	National insurance contributions avoidance on a significant basis is usually associated with annual bonuses paid to a small number of highly paid employees and directors, especially in financial services. The financial services industry is a major employer and, as a result of its internationally recognised expertise, brings considerable earnings and other significant benefits to this country. However, that does not mean that some of its practices and parts of its culture should go unchallenged.
	Last July, I read an article that commented on how often individuals and firms in the financial services industry failed to manage conflicts of interest and chose to better themselves at the expense of their clients. The article then referred to a theory that the root of the problem was that rewards are too great, finance as a whole was insufficiently competitive and made excessive returns and that that had made possible the accumulation of huge wealth and let loose a culture of uncontrolled greed that eventually distorts judgment. The author of the article in the London Evening Standard was the City columnist of that paper—hardly an unsympathetic commentator. He concluded by saying that, whether the theory on the root of the problem was true or not, unless firms genuinely embraced ethical behaviour so that nothing else was tolerated, they must in time destroy the credibility of the whole sector. I do not think that avoidance schemes on the scale and of the kind that the Bill is intended to end are ethical, even though they may currently be legal.
	National insurance contribution avoidance schemes either reduce the amount of money available for further improving the National Health Service and funding contributory benefits or mean that the overwhelming majority who are not engaged in avoidance have to pay more than they otherwise would to make up the shortfall resulting from the actions of a small minority. It is rather like taking from the less well off, including in this context what is sometimes referred to in the media as middle England, to provide money for the well rewarded: there is nothing very ethical in that. In significantly reducing national insurance contributions, avoidance can result in a better competitive situation cost wise for those who are not paying their fair share, in comparison with the overwhelming majority who do. Once again, there is nothing very ethical in that.
	Addressing that problem, as the Bill seeks to do, will help to restore a level playing field and to encourage proper competition. If we value the goal of a fairer society, we need to address a situation where a small number of those employers or employees who are already well off decide to use their financial clout to pay one of the major accountancy firms to produce contrived and elaborate avoidance schemes of the kind being targeted by this Bill.
	What is happening in this area, where it seems that almost anything goes, is in marked contrast to what happens at the minimum wage end of the employment market where the numbers involved in the avoidance schemes covered by this Bill are likely, shall we say, to "be limited". I do not have the figures for 2005, but the annual survey of hours and earnings estimates for April 2004 showed that 227,000 jobs were held by people aged 22 and over with pay less than the adult national minimum wage of £4.50 per hour. While it does not automatically follow from that statistic that 227,000 people entitled to the minimum wage were being paid a lower rate, a study undertaken for the Low Pay Commission suggested that there was a high level of minimum wage underpayment in parts of the clothing and restaurant sectors. The incidence of non-compliance with the minimum wage found in investigations arising from complaints continues to be high at around 40 per cent, although no one knows the extent of undetected non-compliance.
	The last report from the Low Pay Commission referred to concerns that were expressed to it that no prosecution cases for non-compliance had been brought by the Inland Revenue. The commission also noted the weakness of the deterrent to non-compliance and contrasted it with the fact that interest is payable on any arrears of company or individual tax. It recommended the introduction of interest charges payable on arrears arising from minimum wage underpayment and financial penalties for seriously non-compliant employers.
	Any movement in the national minimum wage is normally made only following a detailed report by the Low Pay Commission. Its recommendations, reflecting the composition of the commission, seek to reflect not just the interests of the low paid but also those of employers. Yet many employers do not seem to carry out even a remotely comparable rigorous, open and transparent exercise to that undertaken on whether the national economy and companies can and should afford a few extra pence per hour for the least well off, when it comes to the very much more substantial, and well above average, improvements that now seem to be made each year in the remuneration packages of those in the board room.
	In addition, in a small number of cases, particularly in relation to bonuses in the City, there are ever more contrived tax and national insurance contributions avoidance schemes designed to increase further the already highly attractive financial position of those employers and employees involved. Although I do not often agree with the City columnist of the London Evening Standard, in this case the thrust of his comments were well directed. If we are to move closer to the goal of a fair society, we cannot allow situations to go unchallenged under which a small minority of the very well rewarded are able to avoid their obligations to society to the detriment of the overwhelming majority. I support the Bill and only hope that it achieves its intended objectives.

Lord McKenzie of Luton: My Lords, this has been an interesting, if relatively confined, debate about an important Bill that is central to the Government's aim of deterring tax and national insurance avoidance. Before I address some of the specific points raised, I hope your Lordships will permit me to reiterate the purpose of the Bill. It demonstrates our continuing commitment to take action against avoidance; it is key to achieving the Government's objectives of fairness and opportunity by ensuring that all pay the correct amount of tax and national insurance; it is an essential element in building a serious and credible deterrent against future avoidance activity; and it is needed to secure a total tax and insurance yield of £200 million in 2004–05, and £500 million per annum thereafter. I stress that the figure is for both tax and national insurance.
	As the income tax disclosure provisions have demonstrated, it is not possible to anticipate the range and complexity of these extremely contrived arrangements. The Government intend to close down such avoidance activity permanently, and this Bill will ensure that the Government can deal with any arrangements that emerge in future that are designed to frustrate their intention that employers and employees should pay the proper amount of national insurance on the rewards of employment.
	On the specific issues raised by noble Lords, the noble Lord, Lord Skelmersdale, was critical of retrospection in the Bill and disagreed with the view of the economic sub-committee of your Lordships' House. I stress to the noble Baroness, Lady Noakes, that the retrospection is limited. It is tied to a tax measure which is retrospective, and would have to be fully debated in another place. It is subject to a three-month consultation process before regulations are made and to the affirmative procedure. It is simply not retrospection at the will of the Treasury.
	It was suggested that the ministerial Statement of 2 December was not widely understood by taxpayers. I disagree. A lot of publicity was given to the Statement and to the issue itself. We should recognise that these are not in-house schemes devised by ordinary small companies or by individuals watching the television while sitting in their living rooms. These are highly sophisticated avoidance schemes, promoted generally by large accounting and legal firms. They are well aware of Statements of this nature and have significant empires directed to all sorts of legislation. To suggest that this measure will not come within the purview of those who will mainly be affected by it is simply not correct.
	I was asked why the measure was being introduced now and whether it was an afterthought. The answer is "no". It could not be done in a Finance Act; a separate Bill is needed. This is the first opportunity to introduce legislation in the form of a national insurance Bill. That is why on an ongoing basis we need regulations that do not require primary legislation or a slot in the Queen's Speech and the parliamentary programme.
	It was suggested that the Government need the money. We could spend a lot of time reviewing the Government's finances but we should recognise that we are one of only two countries in the G7 with net debt below 40 per cent of GDP. We have met the golden rule and the sustainable investment rule. As I am sure noble Lords will readily recognise, that is not an issue; the issue is about fairness.
	I believe it was suggested that the schemes that are now being addressed are not illegal until Royal Assent is given to the Finance (No. 2) Act. That may be technically correct but the purpose of the Statement in December 2004 was to give due notice that these kind of schemes would not be permitted in the future. Although the technical legislation followed, given the nature of these schemes there should have been no doubt that both tax and national insurance legislation would be put in place to counter them.
	I was pressed on the meaning of "expedient". Frankly, it depends on the particular circumstances. I would not like to define in detail today the circumstances in which, and how, that might be applied. It depends on individual circumstances. It would be wrong to try to pre-empt that by making a statement from the Dispatch Box.
	I have dealt with the suggestion that no one knew about the measure. I believe I was asked whether we could point to any schemes that warranted this legislation. The purpose of the December 2004 Statement, this Bill and the Finance Act 2005 is to prevent such schemes coming forward. There has been a deterrent effect. I listed some of the schemes that have existed since 1997. We believe that without both parts of the legislation they would continue to be devised.
	My noble friend Lord Rosser gave strong support to the provision, for which I am grateful. He itemised the funds which are protected by the measure. He rightly pointed out that the avoidance that is going on is associated particularly, although not exclusively, with bonuses, and generally with bonuses comprising significant amounts. The thing about bonuses is that in a sense they are one-offs, so it is easier without provisions of this nature to direct avoidance, because you can plan the point, moment and manner of payment quite precisely. That is why avoidance has grown up particularly around that.
	My noble friend talked about ethical behaviour, and I agree with that. The legislation sends a strong message to employers, the majority of whom do not engage in these sorts of schemes. They can now continue not to engage in them with the added comfort that no one is going to get a competitive edge because others are not prepared to adopt the same ethical standards. My noble friend made some very telling points about the comparisons of non-compliance with low pay and what is happening in the tax system.
	The noble Lord, Lord Newby, gave his support to the Bill, and I am grateful for that. In a sense it is trying to make sure that we garner the revenue to which we are entitled and which was intended under the legislation that is in place. He stressed that the schemes that these provisions are aimed at are highly contrived. The reality is that we talk about certainty in the tax and national insurance system, but generally people know when they are straying into those areas; I do not believe, if you look at the schemes that have come forward, that employers have unwittingly found their way into those schemes. They do it purposefully and often on the back of very strong professional advice, which I imagine is quite expensive. A consultation period of 12 weeks is a clear commitment in the secondary legislation, and it will follow the debate taking place in another place on the related tax provisions.
	The noble Lord asked me a question about the clawback of national insurance when someone has left employment. An employer will be able to recover the primary NICs from any payment subject to existing limits. The rights of employers have to be balanced with the rights of employees; therefore it is possible that the employer will not be able to recover all the NICs that may be due, but that will not affect most employers, who do not engage in avoidance. I am not sure that deals fully enough with the particular point that was raised, so I will revert to the noble Lord on that.
	The noble Lord touched on issues of general anti-avoidance rules, and some of the difficulties with those and with clearance procedures are well-aired. As far as the Government are concerned, all measures must be kept under review, because we are absolutely committed to making sure that people pay their fair share. I know that there is a big debate about what that means in any given context.
	I would take issue with both the noble Lord and the noble Baroness, Lady Noakes, on the issue of simplicity. If you look at what has happened to national insurance, it demonstrates overwhelmingly the reverse of the point that is being made. The complexity has followed the avoidance; not the other way around. You have a relatively straightforward system to start with, someone gets around that with a device that is not caught by it; there is legislation to deal with that; a further measure to get around that; and legislation to deal with that. The complexity has followed the avoidance; not the reverse. Indeed, one of the benefits of this measure is that it negates further complexity because the nature of the retrospection means that it is less likely, going forward, that greater complexity will be needed.
	The noble Baroness, Lady Noakes, restated the position of the Conservative Party that it does not oppose this Bill. I understand that position, and I recognise that we will probe some of these matters further in Committee. She agreed that the Clause 7 disclosure requirements do not really add new issues to the matter, which has been around for a little while. She referred to the four tests of the noble Lord, Lord Rees, and the issue of how precise was the warning of 2 December 2004. I argue that it was precise enough. I stress again that employers know when they are getting into the ambit of such schemes. If you look at the history of some of the intricate nature of the schemes, people know what they are doing. It has become clear that the existence of that statement and the legislation that has followed, including this Bill, have helped negate some schemes that would have otherwise gone forward.
	The convention on human rights was touched on. We will have to see how that issue develops, but the clear advice to the Government is that the Bill is compliant and proportionate. I say again that the Bill is targeted on retrospective tax measures, which go through the procedures of another House and the affirmative procedure in this House.
	I hope that I have cleared up the numbers. I think that the £95 million and the £240 million relate to national insurance only, whereas the £200 million and the £500 million relate to national insurance and tax. If I am not right about that, I will write to the noble Baroness. Quite who was diligent enough over the Christmas break to update the Government's website, I do not know. I have not checked back to see what the sequence was, but I believe that I have given the correct explanation of the numbers.
	The debate about the gap between avoidance and evasion is interesting. I guess that, when push comes to shove, the two can adjoin closely. However, that is perhaps a debate for another day. I reiterate the point that the measures in the Bill are proportionate.
	The point was made that some of the avoidance issues arise from the incentives that are offered. That underlines the difficulties that the Government face in offering incentives through R&D tax credits and lower rates for smaller companies. If you put in place incentives, for which business often presses, there is a risk that there will be abuses and that the incentives will have to be reversed or ameliorated. The more simplicity you have, the more likely you are to have avoidance—the complexity follows the avoidance.
	The question was asked whether the Government are acting proportionately in relation to evasion and avoidance. I argue that they are. The difficulty with evasion is knowing precisely how widespread it is. One hopes that, if you know that there is evasion, it should be relatively easy to tackle it.
	These are big issues. We want taxpayers to be compliant, as I believe people in the UK overwhelmingly are. We should be pleased about that, as it is certainly a contrast to what goes on in some countries, although that does not negate the need for anti-avoidance provisions such as those in the Bill that ensure that people do what they are required to do.
	I think that I have dealt with all the points that have been raised. If I have not, I will look at Hansard and write to noble Lords.

Lord Bassam of Brighton: My Lords, on behalf of my noble friend Lady Andrews, I beg to move that this Bill be now read a second time. Before I start, perhaps I should explain that my colleague and noble friend Lady Andrews is unable to be with us today because of family bereavement. I am sure that all Members of your Lordships' House will want to send their sympathies and support to her.
	This short Bill of two clauses comes before the House from the other place unamended and with the support of Her Majesty's loyal Opposition, who went on record as saying:
	"There is little difference between the Opposition and the Government . . . We think that postponement is a good thing".—[Official Report, Commons, 1/12/05; col. 416.]
	The Liberal Democrats also said: "We support the Bill". That is fairly clear.
	On 20 September last year, the Government announced our decision to extend the remit of the inquiry by Sir Michael Lyons into local government funding and, as a result, to postpone the 2007 council tax revaluation in England. The Bill is the legislative consequence of that decision. In brief—I will go through the detail for the benefit of noble Lords a little later—it removes the requirement in the Local Government Finance Act 1992 for a revaluation of domestic properties for council tax purposes to be implemented by April 2007. At the same time, it removes the requirement for subsequent revaluations to take place at intervals of no more than 10 years. Also, it replaces both those provisions with another that allows the Secretary of State to set the date of any revaluations, by order subject to affirmative resolution in the other place. That differs only slightly from the existing order-making power in the 1992 Act for the Secretary of State to set the date of a revaluation if it is to be in advance of the 10-year maximum interval.
	It is not the biggest Bill ever to come before your Lordships' House, but it has importance beyond its size for the future of local government in England. That importance comes from the time and space its provisions give us to allow Sir Michael to complete his inquiry, and for the Government to properly consider his recommendations and consult widely on them, before moving forward with a reformed local government finance system.
	I do not intend to speak for an overly long time, but I would like to cover three things. First, I would like to remind your Lordships of the background to the Bill and the context within which it sits; secondly, I will outline the specific detail of the Bill and its provisions for the record; and finally, I will address some of the myths and rumours that have sadly circulated since the announcement of postponement and, in so doing, make it clear exactly what the Bill does and, perhaps more importantly, does not do.
	I shall begin by setting the context and by explaining our current reform agenda and the changes that are already under way. We are clear that the future of local government is critical to the future of the country. Local government is at the heart of national life and has a pivotal role in championing the communities in which we live and in helping them to prosper. It plays an essential role in delivering services, leading and co-ordinating the activities of local public, private and voluntary organisations, and making communities more pleasant to live in.
	When speaking at Second Reading in another place, the Minister responsible for communities and local government paid tribute to councillors of all parties and to hard-working public servants for the way in which they have raised standards. Since then we have seen the results of the Audit Commission's Comprehensive Performance Assessment 2005, which shows that—even under the new and more challenging framework—more than 70 per cent of councils are improving strongly or improving well. That is an impressive performance, and shows clearly that local government is responding to the challenges of leading their communities and tailoring service delivery based on the real needs of local people, while at the same time delivering services that represent good value for money.
	Important changes are under way in local government. The new deal for communities initiative, neighbourhood wardens, and neighbourhood renewal strategies to tackle problems of deprivation and disadvantage have all been taken forward by councils.
	Local authorities are leading new children's trusts across the country that are bringing together social services, education, health and other services, and local area agreements enabling councils and central Government to recognise and agree local priorities, rationalise funding streams and support greater local leadership. The Government believe that those changes represent not only a big challenge but a massive opportunity for local government, and we believe that that opportunity is most likely to be grasped if local government can focus on service delivery supported by financial stability.
	Underpinning that, the Government announced on 5 December last year the provisional local government finance settlement for 2006–07 and 2007–08. That settlement—the first provisional multi-year settlement that we shall have delivered—is a further demonstration of our commitment to local government delivering local services. By 2007–08, the increase in government grants for local services since the present Government took office will be 39 per cent in real terms. Through the new settlement arrangements the Government have provided another significant boost to local government with a financial package that is stable, predictable and adequate to meet the pressures that local authorities will face over the next two years, while keeping council tax increases down to acceptable levels. With the move to three-year settlements at the next spending review, that stability and predictability will be even greater.Investment and reform have gone together and have delivered.
	The communities that our local councils serve are growing ever more diverse with a greater range of needs and higher aspirations than ever before. That is something which we should all celebrate. But we should also realise that it means that local government's role will have to change alongside the communities it serves. That is why we launched a debate on the future role of local government—local:vision. The debate has already generated a number of excellent ideas, some of which are making a difference to people's lives.
	One of the clearest messages emerging from the local:vision debate, and which was reinforced by Sir Michael Lyons when he met with Ministers in the summer of last year, is that we need to be clear about what the new role for local government will be before taking decisions about individual functions or means of funding. The Government have listened and agree. We believe that we should make changes to local government funding only when we have a clear and complete understanding of what we want local government to do. That understanding must be shared not only by central and local government but by all those who help to deliver services and, most importantly, by the people they are there to serve—the general public. In short, we must settle function before settling funding.
	Your Lordships will be aware that in July 2004 the Government appointed Sir Michael Lyons to carry out an independent inquiry into local government funding, which was originally due to report by the end of 2005. He has made good progress with that remit and has started to work on his extended terms of reference, which the Government announced on 20 September. He is now being asked: to consider the current and emerging strategic role of local government; to review how the Government's agenda for devolution and decentralisation could improve services; and, in the light of that, to consider how to manage pressures on local services. In the light of this work, Sir Michael will then address critical funding issues, including those of fairness, accountability, clarity, efficiency and effective management. He will produce his final report at the end of 2006.
	As noble Lords will know, Sir Michael published a consultation paper and interim report on 15 December. This set out his approach to his extended remit and his preliminary thinking on his work to date. The Government welcome Sir Michael's publication as a useful contribution to the debate on the future role and function of local government and the way it is funded.
	This is an interim report—not a final one. Sir Michael has not come to firm conclusions, but has elaborated on his thinking to date. However, a number of important messages emerge from it. First, it reaffirms the Government's view that effective funding reforms must be based on a clear view of what we expect from local government and, therefore, to have proceeded with revaluation of council tax in 2007 would not have been sensible. Secondly, Sir Michael's research has revealed a weak public understanding of how local government is funded, confusion over how the responsibility for the delivery of local services is shared between central and local government and, in turn, a poor understanding of the cost of public services. Sir Michael suggests that this lack of understanding raises important questions about accountability and transparency.
	With the extension of Sir Michael's remit, there is now a real opportunity to promote a greater understanding of local government among the public. We encourage all concerned to contribute to the next phase of Sir Michael's inquiry so that he can offer the best possible advice in his final report at the end of the year. In this way we are confident that Sir Michael's work will provide the platform for fundamental and lasting reform.
	As your Lordships will be aware, at the same time as the Government announced the extension of Sir Michael's remit, they also announced that they had decided to legislate to postpone council tax revaluation. As the Government's announcement of 20 September explained, the case for revaluation—that it is right to maintain a fair alignment between house prices and council tax bands—is linked to wider questions about the structure of council tax and to the operation of council tax benefit. This, linked to the other changes in the local government finance system, such as those that I outlined earlier, all led to the view that to proceed with the current timetable for revaluation would not be sensible. The Government, therefore, concluded that they need the flexibility to revalue as part of a fully developed package of funding reforms, rather than as a precursor to them, and at a moment of greater financial stability for local authorities.
	Although this is a short Bill, it may be helpful to your Lordships if, as I promised earlier, I now explain its effects in some detail. First, it removes the requirement laid down by the Local Government Finance Act 1992, as amended, for the compilation of new lists on 1 April 2007. Clause 1(3) amends Section 22B of the 1992 Act by removing the duty on the listing agency—in practice, that means the Valuation Office Agency—to compile a new valuation list for billing authorities in England on 1 April 2007, and a draft of that list by 1 September this year.
	By way of a slight digression, at this point I should reaffirm to your Lordships that, to prevent nugatory expenditure, the VOA stopped work on the revaluation of domestic properties in England immediately the announcement was made. But we should be quite clear that until this Bill—particularly this provision—is enacted the VOA remains obliged to carry out the revaluation. If Royal Assent is not achieved by the Summer Recess, draft valuation lists must be published by 1 September this year.
	The second substantive provision comes from subsection (4) which removes the requirement for subsequent revaluations in England on the 10th anniversary of the previous one, unless an earlier date has been specified by order. Until the Government have received and considered Sir Michael Lyons' final report, we cannot take a view on how frequently revaluation should occur. Therefore, we think it right that we should not be statutorily committed to revaluing on a rigid, predetermined cycle.
	Finally, the Bill replaces those two provisions with a power for the Secretary of State to specify by order the date on which a new valuation list must be compiled. Such orders will be subject to the affirmative resolution procedure in another place, following the precedent set for similar provisions contained in the Local Government Finance Act 1992, which provided for the council tax in the first instance. For the sake of completeness, I should make it clear that Clause 2 simply provides for the short title of the Bill and, of course, for its extent.
	As the title of the Bill makes clear, the provisions have effect in England only. It does not in any way affect the approach being taken in the devolved administrations. In Wales, executive local government functions are, rightly, devolved. I can reassure noble Lords that the Government consulted the National Assembly for Wales on the subject matter and extent of the Bill before its introduction in another place, and the National Assembly indicated that it was content that the Bill had no effect on provisions relating to it. The Principality implemented its own council tax revaluation in April of last year.
	Noble Lords will be aware that the provisions of this Bill have no effect at all on the state of affairs, or local taxes, in Scotland or Northern Ireland.
	I conclude by turning to some of the myths and rumours that have abounded in recent months and weeks, some of which have been frankly ridiculous and absurd, and many little more than scaremongering. I will take this opportunity to set the record straight and reassure the House of the actual position.
	I cannot emphasise too strongly that this Bill does three things and three things only. It postpones the 2007 council tax revaluation exercise. Yes, despite the confused messages being fed by some to the press, the Government are postponing revaluation and have made clear that we do not believe that it will now happen in the lifetime of this Parliament. It removes the requirement for subsequent revaluations to take place at intervals of no more than 10 years. Finally, it provides power for the Secretary of State to set the date of revaluations by order, subject to affirmative resolution, as I said earlier, in another place. That is all it does. It does not legislate for a "snooper's charter". It does not give powers to the Valuation Office Agency to forcibly enter homes or to take intrusive photographs at will. It does not change the basis on which a property will be valued.
	The Valuation Office Agency has been tasked to maintain an accurate valuation list for the purposes of fair distribution of council tax liability since the Local Government Finance Act 1992 was first introduced. The VOA has powers to carry out property inspections and, if need be, these powers extend to internal inspections. This is not a snooper's charter, it is simply necessary to ensure that everyone pays their fair share of the tax. Indeed, the current powers date back to the Local Government Finance Act 1992. In fact, powers to carry out property inspections of this nature have existed since before the Second World War, so reports suggesting that the Government are introducing new powers are simply untrue.
	It is important to recognise, however, that staff and contractors of the Valuation Office Agency have no powers to forcibly inspect a property for council tax valuation purposes. The VOA does not forcibly enter people's homes—it has neither the legal power nor the desire to do so. Yes, there are provisions in the 1992 Act for fines to be imposed if a valuation officer is refused access, but these provisions have never been invoked. Moreover, internal inspections are the exception and certainly not the norm. Suggestions, which I have read, that all 22 million dwellings in the English housing stock will be individually inspected are frankly absurd.
	As for photography, we have seen ridiculous suggestions that the VOA will be taking intrusive pictures of people's bedrooms and personal belongings. Your Lordships will wish to be reassured that for a member of the VOA to take internal photographs of a property is extremely rare and would only ever happen with the express permission of the householder. Indeed, the VOA has very clear guidance for its staff about on-site photography, which specifically states that photographs can only be taken with the permission of the householder and that they must not show people, details of security systems, or valuable possessions.
	Finally, I wish to be clear that the basis on which property is valued for council tax purposes is the same now as it was when council tax was first introduced by the party opposite. The VOA seeks to assign a market value based on the variables that operate in the market. If one property has a scenic view and another overlooks a chemical plant, it is likely that the scenic view will attract a higher relative market value than the view of a chemical plant. I ask: what is surprising about that? If one property has an attribute, say an extension or loft conversion, which leads to its market value being higher than that of its next door neighbour, it is only fair that that should be reflected in its banding. That has always been the case—nothing has changed.
	The fact that the VOA is capturing property attributes in a database using codes does not indicate some sinister new big brother database. It is simply the most effective and efficient way of capturing data in a form that can be used by its automated valuation software to come up with a fair and justifiable valuation. That process has previously been done manually by a valuation officer. The only difference now is that the valuation officer has the benefit of modern technology to support him in his task—making valuation quicker, more efficient and more consistent. I would argue that that surely is in everyone's interest.
	For the avoidance of confusion, it is worth my putting on record one or two specific details of the valuation process. For example, all properties are currently valued at 1991 equivalent values—1991 being the antecedent valuation date. This includes new properties. We should also be clear that extending or improving your property does not automatically lead to an increase in council tax. The value and council tax band of a property is only reviewed at the point of a 'relevant transaction', such as transfer of ownership through sale. Also, as council tax is based on bands, a property could rise in value as a result of improvements but remain in the same band, even if it were sold. So it is perfectly possible for a homeowner to improve his property without automatically incurring higher council tax charges.
	Finally, we have also seen stories suggesting that people who are unable to pay their council tax will be sent to prison. That is completely untrue. People who wilfully refuse to pay may be imprisoned, but that is entirely different from the position of someone who is unable to pay. Nobody has ever been gaoled for being unable to pay, nor would they be.
	Two and a half million people aged 60 or over now receive council tax benefit, which provides a rebate of up to 100 per cent on their actual bills. We know that many more who are entitled to benefit do not claim, and the Department for Work and Pensions is actively seeking to address this. It has already made the process for claiming the benefit easier and is working with others to encourage greater take up. In addition, households with someone aged 65 or over received £200 with their winter fuel payments, unless they were already entitled to a 100 per cent council tax rebate.
	These myths and rumours have only two effects—they undermine the council tax system and, worse, they frighten vulnerable members of society. I sincerely hope that this scaremongering campaign will stop and that, at least in this House, we will see a return instead to proper debate and dialogue based on fact. I commend the Bill to the House.
	Moved, That the Bill be now read a second time.—(Lord Bassam of Brighton.)

Baroness Hollis of Heigham: My Lords, while respecting the fact that the Bill concerns council tax revaluation, I should like to raise a wider issue of local authority finance, which I am confident that the Lyons report will also scrutinise. That is the matter of the business rate. The business rate should not only be raised locally but retained locally.
	Before 1990, economic development within local government was enlightened self-interest. A city like mine of Norwich could spend local ratepayers' money on starter units for very small businesses and support services—trying to grow those businesses from two or three persons to 10, 15 or 20. It meant that an authority such as mine could make available key worker accommodation for businesses and companies seeking to expand or to move into the locality. One big decision was that we not only started but, although it was a loss leader, retained an airport because we were told by the head offices of companies located in Norwich that that was a key facility for a city that had relatively poor road communications. We did that. We invested in the local economy of our city because we knew that although that cost rates at the time, down the road, revenues would return to enhance the health of the city and its capacity to be an economic powerhouse for its region. In all the years when I was active, we discussed that business rate with the chamber of commerce. I am sure that the same was true for my noble friend, who is also a former leader of a local authority. Those discussions with the chambers of commerce were entirely amicable and, if it was appropriate, we amended our agenda accordingly. As a result, we could persuade local citizens that what we needed to spend we raised locally and that we were accountable locally. Because most of our revenues were raised locally, there was a transparency between what we did, what we spent, what we raised and what we were held to account for in local government elections.
	Since 1990, one of the most perverse pieces of legislation was the nationalisation—it was about the only thing that was nationalised—of the business rate. I want to address two arguments—the other side of the advantages that we had before 1990. It has resulted in a very serious democratic deficit. Now, something like 85 per cent of local government revenues come from central government. As my noble friend rightly said when discussing the Lyons report, as a result local people do not know what their money buys or the degree to which their local authority is effective, efficient or offers value for money because it is cloaked, concealed and cushioned by the moneys coming from central government. There is an obscurity where there should be transparency and there is a lack of accountability. There is an erratic volatile quality because, of course, if something like only one-seventh of moneys is raised locally, for every £1 of expenditure that you want to raise, you have to raise £7 locally. There is a very high gearing effect which increases the volatility against which so many people currently complain.
	Therefore, the first problem with nationalising the business rate is the democratic deficit, but the second problem is the economic absurdity of it. There is now no connection between economic development and financial return. Because over many decades my city has invested in its local economy, next year, it will pay into the national economy something like £57 million in business rates and will get back about £37 million in grants from central government—both at district and at county levels on a pro rata population basis. In other words, as a result of the city's investment as an economy in the past, it exports something like £20 million to other authorities, whereas the adjacent, sometimes rather sleepy, indolent and low-rate and low-activity culture rural districts are doing very nicely, thank you. Next year, one will export £15 million in business rate, but will get double that figure back—£30 million—from central government for doing nothing.
	The consequence of that detachment and dislocation between economic development and the business rate means that whether a local authority invests in its economy and does anything, or does not invest in its economy and does nothing, matters not at all. So why bother? Why should any local authority do anything to help its local economy and business when it will not get a penny piece back in revenues? It is more perverse than that: local citizens will be asked, through their council tax with its very high gearing ratio, to invest in local business, the rates of which are exported to other local authorities. Not only does your own citizenry not benefit from economic development, you end up charging your local citizens for the privilege of exporting more moneys to other local authorities which are doing nothing similar of their own.
	Can my noble Lords imagine a more perverse way to calculate a quarter or a third or so of local authority expenditure and financing than a business rate which completely breaks the connection between what a local authority does and what it receives back to support its local community. Are you surprised that local government becomes increasingly indifferent to the concerns of business when whatever it does, positively or negatively, makes no difference for the returns that it gets? It is bizarre, it is perverse. It is surely alien to the issues we want to see resolved in the Lyons report, and also more broadly to encouraging local government to take a comprehensive view across the whole of its city—not just its citizens and residents, but its workers and employers. Bearing in mind the argument of the democratic deficit and of encouraging local government to take a healthy responsibility for economic activity within its local economy, I hope that my noble friend will restore back to local government its business rate.

House adjourned at twenty-nine minutes past five o'clock.
	Monday, 9 January 2006.